Tightening
Chains of SupplyEthanol plant builders say their waiting
lists are growing—not only because of their own
limited abilities to handle new jobs, but also because
of the size and capabilities of the suppliers who serve
them. It’s a critical period right now for vendors
whose ability to meet the demands of the U.S. ethanol
expansion has a major bearing on the near-term success
of their own companies.
By Nicholas Zeman

Deadline pressure often brings results but, as almost
everyone knows, it can also cause a lot of stress. Just
ask any ethanol plant builder who has to secure and
manage materials, services and equipment even after
the plans have been drawn, the site selected and the
crews mobilized. Not surprisingly, the shared perspectives
of ethanol industry suppliers and service providers
can provide valuable insight into the logistics and
challenges of the present ethanol plant rush.

The first difficulty for any company engaged in the
business of building ethanol plants has been a shortage
of stainless steel. “My understanding was there
were massive amounts of stainless steel being purchased
by China in preparation for the World’s Fair,”
says Rod Simms, project engineer for ICM. “Anyway,
that’s the story we heard—and both the availability
and the price of stainless have gone up substantially
over the past three years.” This affects construction
projects and equipment manufacturing considerably, Simms
says, because many ethanol plant tanks and vessels are
made from stainless steel.

One factor is that the surcharge for stainless steel
has risen from 73 cents to $1.60 per pound since March,
according to Jim Bokor Sr., president of Robert James
Sales Inc. (RJS), a steel distributor based in Buffalo,
N.Y. “Any piece of stainless steel has a surcharge,
he said. “You can’t dodge that bullet.”
The steel surcharge is a fee added to the overall purchase
to cover the increased price of certain metals needed
in the manufacturing process. “The demand for
nickel in stainless steel is going up,” Bokor
says. In addition, the consumption of stainless has
spiked due to the current popularity of the material
in household appliances. “It used to be that you
didn’t see a stainless steel refrigerator except
in restaurants, Bokor says. “Now everybody has
stainless in their kitchens.”

The other problem is that there are some shortages of
material at the mill end of the steel business. “The
flat-roll [businesses that] manufacture the sheets are
very busy, and a lot of the pipe mills are on allocation.
… They’re not getting enough steel to produce
what they want to produce,” Bokor says. “This
causes deliveries to go way down.”

A Plant Per Week
In terms of industry expansion, ICM alone has gone from
three or four plants a year to three or four plants
a month, according to Simms. “So we’re looking
at roughly a plant a week,” he says. This has
created a peak in demand over a relatively short time
for major equipment. “When you look at a rise
like that occurring over the last three years, it’s
a pretty rapid escalation, ” he adds.

These
circumstances have put some pressure on unique pieces
of equipment produced by a finite number of manufacturers.
“The type of centrifuge [for example] that’s
used to dewater distillers grains is only manufactured
by two or three companies in the world,” explains
Simms, adding that while there are other manufacturers
potentially available, they’re not well known
in the ethanol industry. The selection and evaluation
of new vendors has become a major part of the design/build
process. “This requires a substantial amount of
what we call ‘bedding time’ to really determine
if manufacturers (new to the ethanol industry) are capable
of doing what the industry needs, and if we can get
them up to speed on what the industry is looking for
in certain areas,” Simms says.
The expansion has occurred so rapidly that the identification
and evaluation of new vendors have been an important
part of the construction process. While there may not
be an actual shortage, Simms says circumstances have
been dictated by the fact that it has taken time to
identify and qualify new vendors. “Now you might
need up to eight vendors, when in the past you’ve
only needed two,” he says. “It wasn’t
that they weren’t there, but no one necessarily
knew who they were and hadn’t checked them out
to the comfort level of spending several million dollars.”

Noticing a New Market
Renewable fuels have seen a surge of new vendors that
have traditionally served petroleum and chemical industries,
but are now noticing a new market. For instance, RJS
noticed its pipe fittings and flanges would work in
renewable refining. “Robert James Sales has an
inventory that you would have to go to Houston to match,”
Bokor says. “With $20 million in materials on
hand, it [beats] everything on the East Coast or in
the Midwest. You can build a lot of ethanol plants with
$20 million, and we’ve been gearing up for this
business for almost a year.”

Process engineers at the various design/build firms
are looking for new vendors, and there are vendors looking
for new customers. “Those two have to get together,
and there has to be that traditional ‘how are
we going to work together?’ dance that goes on,
and when that is all done, maybe you have a new vendor
on your list and maybe you don’t,” Simms
says.

This process of evaluation that occurs between a design/build
firm and new vendors is familiar to Bokor. “We’re
doing great business with [plant builders] now, but
it took them a long time to figure out that we were
for real,” he says. “We kept saying, ‘We
have it. We have it!’… Now they’re
believers—Delta-T, Lurgi—[and] we’re
getting calls from a lot of them. I think as time goes
on we’ll get more.”

Design/builders may require a period of testing as well
with certain pieces of equipment to ensure performance
expectations. “While there are a number of pump
vendors [for instance], until someone has actually used
a particular pump in a plant somewhere and checked it
out—made sure it performs as promised—you
are reluctant to put them on the approved vendor list,”
Simms says.

Bokor agrees that there are shortages across the spectrum
from materials to manufacturers in an industry with
such specialized and unique products. “Heat exchangers
are taking forever to get,” Bokor claims. “The
fabrication shops are busy. Everybody is busy. It’s
a great time to be in the ethanol or biodiesel businesses.”

Forecasting
The task of placing orders and procuring services to
meet construction deadlines is an important managerial
function, which requires foresight, advanced planning
and other considerations that may be overlooked. One
of these major planning ordeals, for example, is the
construction rail spurs.

“Many plants wait until the later stages of construction
before they contract out the track work,” says
Rick Volkmann of Volkmann Rail. “They’re
not realizing how long it takes to build the track and
get the materials.” Many of the big railroads
are doing massive tie replacement programs, and the
short lines have had low interest loans available to
them, Volkmann explains, which have allowed for various
construction projects. “The ties and the rail
are both in very tight supply,” Volkmann says.
Manpower has been an issue as well. ”It’s
always hard to get good employees, especially since
our work is physically demanding.”

These are the market circumstances that have limited
the operations of Volkmann Rail, which said it has not
had to turn down any customers yet from operating at
maximum capacity but that it was certainly a possibility
in the future. “We were quoting [on a new plant]
this week,” Volkmann says. “They need it
completed in April. So that would mean construction
in Iowa through the winter to get it done in time because
we can’t get the materials for at least two months
to start.”

The lead-time on equipment has increased substantially,
upwards of 50 percent in most cases. This means instead
of placing an order eight months in advance, manufacturers
now need 12 months to deliver. “The lead times
are going up farther and farther, and what is happening
is people in the business are just placing their orders
earlier,” Simms says. “I don’t know
of any plants that have necessarily been held up in
the industry because of delivery of equipment, but certainly
the number of vendors involved and the lead time on
equipment has changed significantly.”

Extended planning can also cause problems due to the
volatility of some of the commodities that are involved
in ethanol plant construction, like the aforementioned
stainless steel. “There were good contracts in
place with certain distributors with long-term pricing,
but now you can’t deliver, not today, not with
what is going on,” Bokor says. “For somebody
to tell me that I have to take a contract and guarantee
the price for a year, I’d have to seriously think
about it, and the price would be astronomical.”

A company operating on tight margins cannot afford to
have funds suspended for eight or nine months, Bokor
says. “We take firm price contracts for 30, 60,
120 days, six months,” he explains. “I’ll
even do it for a year on some of the commodities, but
I wouldn’t do it on pipe—it’s just
too volatile.”

In the current market, it is extremely difficult to
budget for a plant in advance because of rapidly changing
prices. Of course, this difficulty runs parallel with
the ability to order parts and secure services. “To
get your permits for this or that takes time …
and then they get a budget to build the plant,”
Bokor says. “Then it’s three to six months
before they decide it’s time to buy. Well, by
that time, the budget prices are no good. They’re
absolutely thrown out to the wind [because] prices have
gone up.” EP

Nicholas Zeman is an Ethanol Producer
Magazine staff writer, reach him at nzeman@bbibiofuels.com